Government interference sends the wrong signal on broadband

By Kelly McCutchen 

Telecommuting, telemedicine, virtual schools and other high tech advances hold great promise for a large, rural state like Georgia, but roadblocks to investment will make progress much like driving a Lamborghini on a dirt road.

Georgia’s biggest “pothole” is the local regulation of cable television. By ending local television monopolies, the state will lower prices, improve quality, create jobs and spur much-needed investment in rural communities. This adds up to a big win for consumers.

Convergence is the new buzzword. Making telephone calls, reading and sending e-mail, checking live traffic and weather conditions or watching television will soon be possible on almost any single device. A multitude of companies would like to provide this “bundled” service to consumers. Technology is making it possible, but archaic regulations are getting in the way.

Cable providers and Internet startups such as Skype (now owned by eBay) and Vonage are using VoIP (Voice over Internet Protocol) to offer telephone service. Telephone companies want to use similar technology to offer television and other video services. Unfortunately, television is still governed by outdated laws passed when cable television was considered a “natural monopoly.” A new technology, IPTV (Internet Protocol Television), along with satellite-based services, has made these laws obsolete.

Competition encourages innovation, improves quality and lowers cost. A 2004 study by the General Accounting Office (now the Government Accountability Office) found that communities with broadband competition experi­enced lower rates — 23 percent lower for basic cable, on average — and higher service quality.

Expanding these services requires a much more robust broadband network. The investment is costly, but the good news is that far more people are willing to pay for television than they are for Internet service. This market opportunity could be the financial incentive for a massive expansion of Georgia’s communications infrastructure. This won’t happen anytime soon, however, unless Georgia eliminates monopoly protections for cable television.

Arizona, California, Indiana, Kentucky, Louisiana, North Carolina, New York, South Carolina, South Dakota, Texas and Virginia have all passed statewide video franchise legislation to open their markets. When companies offering these new services decide on where to invest, we should not be making it easy for them to line up Georgia behind other states with less burdensome regulations.

Existing cable providers who have enjoyed the benefits of a monopoly are concerned that they will face competition while being trapped in restrictive franchise agreements with local governments. This doesn’t have to be the case. As Diane Katz of the Mackinac Center for Public Policy puts it, “franchise agreements, unlike contracts, do not involve a willing buyer and a willing seller. In reality, they are instruments of regulation. Therefore, it would be perfectly appropriate for the [Michigan] Legislature — in­deed incumbent upon lawmakers — to free the market from them.”

The next challenge is convincing local governments who are concerned about losing franchise fee revenues. Research indicates they should be more concerned about what to do with the increase in revenue.

The introduction of competition from wireline companies will increase the number of video service subscribers between 29.7 percent and 39.1 percent, according to researchers Robert W. Crandall and Robert Litan, who analyzed 2006 survey data. More subscribers means more franchise fees – aside from the fact that current satellite subscribers pay no franchise fees. If satellite subscribers switch to this new technology, that’s even more revenue for local governments.

Over the long term, Georgia should evaluate franchise fees. They are nothing more than a hidden tax. Researcher Jonathan Samon of the Georgia Institute of Technology declares, “This [cable franchising] system is unjusti­fied because the costs passed on to consumers from the cable companies constitute an essentially needless wealth transfer from consumers to their municipality.”

North Carolina has eliminated franchise fees for video services and added this service to the state sales tax, which is clearly visible on the subscriber’s bill. These revenues are then shared with local governments. Regardless of how the taxes are handled, it’s important to remember that municipalities will retain their right to regulate the public rights of way that carry the network wires.

Samon sums up the argument well: “As competition continues to embed itself in the industry, the future for the video marketplace looks bright for customers and providers alike. Officially breaking the monopolistic stranglehold that cable companies enjoy over consumers by eliminating exclusive cable franchises would significantly brighten that picture.”

Georgia consumers deserve the better services and lower prices that reducing government interference in the video market will give them. More importantly, creating the best investment environment for this state’s telecommunications infrastructure is critical if Georgia is to remain competitive in a growing global marketplace. This should be a top priority issue for new legislators in January.

Kelly McCutchen is executive vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (October 13, 2006). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.

Leave a Reply

Your email address will not be published. Required fields are marked *